IN EARLY MARCH, the unemployment rate fell to 8.9 percent, making things even brighter. “There is more optimism than not in [this] job report,” says Chris Herbert, director of research for Harvard University's Joint Center for Housing Studies. “That is a question mark going forward."
But economists don't think we're out of the woods yet. Here are three factors that could continue to influence jobs and demand for apartments.
1. Public Sector Woes
The whole country has been watching the municipal happenings in Wisconsin. And the Dairy State isn't the only victim: State and local budgets across the country are tapped out.
“One of the major weights on job growth is state and local employment, because so many regional governments are very weak right now,” says Celia Chen, senior director of the Moody's Analytics research staff. “We do expect state and local governments will make cuts. Even so, we do expect that employment growth will accelerate this year."
Moody's expects 0.25 percent job growth this year and 2 percent or more job growth in 2012. Moody's also projects state and local governments to cut 1 percent of their job force, which Chen doesn't expect to be that significant, given the overall growth in jobs.
“If you get new jobs, it's a plus,” says Stan Ross, chairman of the board at the University of Southern California (USC) Lusk Center for Real Estate. “If you lose the jobs, whether it's school teachers, police, or any kind of government service, layoffs could have an effect. Those are significant."
Herbert, meanwhile, thinks a lot of these budget woes will go away as the economy improves and increases the tax base. “It's a significant issue for a lot of states, and they're grappling with it,” he says. “That's in no small part due to weakness and lower tax revenue. If we are starting to turn the corner and getting more sustained job growth, that may solve the state problems."
2. Inflation and Energy Costs
On the surface, rising energy costs could help the apartment industry.“The energy prices are more of an issue for homeowners to the extent that you associate homeowners living farther from public transit," Herbert says. “It might help to the extent that the high cost of moving out is factored into the decision of whether to buy."
But ultimately, the aftereffects of higher energy costs could hurt everyone. “It's probably more of a question for the economy, whether sustained high energy [costs] will lead to a recession, job losses, and the spillover effect of weaker demand,” Herbert says. “Is what we're seeing a temporary spike due to uncertainty in the Middle East? Or are we seeing something more secular that will be sustained?"
Herbert isn't alone in his concern. “The recent turmoil in the Middle East is something that could threaten the economy, given that oil prices are rising and higher prices would slow economic growth," Moody's Chen says.
Moody's doesn't have any projections yet of what oil prices may do to the economy, but Chen knows it could have major effects. “Spending more on gas means that you have less money to spend on housing," she says.
Gregory H. Leisch, CEO of Alexandria, Va.–based Delta Associates, sees the risk of inflation, in general, as being a threat to commercial and residential real estate. “Energy prices are the biggest piece of it,” he says. “I don't know whether food prices will come to have that big of a bite."
3. Homeownership Issues
The gap between homeownership and rentals is still wide, even almost five years after the real estate meltdown. Ross says his students at USC found that there was still a 30 percent to 35 percent premium to own a home. Chen says home prices would have to drop 9 percent to get back to their normal ratio to rental rates.
And if interest rates rise, Leisch thinks the gap could widen even more between homeownership and rental rates. “The interest rate issue will play positively for the apartment market,” he says. “As interest rates rise, it makes forsale housing more expensive."
That presents a lot of upside for rental owners. “Household growth is occurring on the rental side,” Herbert says. “One of the questions is when will the homeownership market turn the corner and, if it does, will it have implications for the rental market in terms of taking a bit of its growth?"
Herbert actually believes that an improved homeownership market could lift the entire economy, bringing the rental market along with it. “The return to economic growth could even help spur rental growth more,” he says. Until then, homeownership woes could help limit rental's growth.
“To the extent that the [for-sale] market continues to fall more than expected," Chen says, “it could result in that downward spiral between falling home prices and rising mortgage delinquency rates and foreclosures, which will cause home prices to fall and have an effect on construction employment and consumer spending and drag the economy down.”